FDI has played a glorious and
profit-oriented role in several countries of the world. In the recent past ASEAN countries
have been big beneficiaries. Now some of these countries are contributing abroad through
the investment of FDI. It is high time that we learn from the success stories of use of
FDI, and also gear up our positive efforts to create a conducive atmosphere to attract FDI
in Pakistan. This piece looks at the following aspects FDI:

Investment Policy 1997 with FDI emphasis

Time Series Analysis (1990-1991 to
1999-2000) of FDI.

Group wise distribution wiffi focus on
Products and Countries.

The above aspects are now explained below:

Investment Policy 1997

The previous Government of Mian Mohammad
Nawaz Sharif announced a new Industrial Policy with the objective to enhance the level of
foreign investment to at least US $ 2 billion per year in various fields. The salient
features of this policy are given below:

1. Foreign investment on repatriable basis
was also allowed in agriculture, services, infrastructure and social sectors.

2. Manufacturing sector was prioritized in
the following four categories:

a) Value added or export industries

b) Hi-tech industries

c) Priority industries,

d) Agrobased industries

The tariff on imported plant, machinery
and equipment which was not manufactured locally for category (a), (b) and agriculture was
made zero related while for category (c), (d) and social service would be charged @ 10%.

Industries included in (a) and (b) will
enjoy first year allowance for balancing, modernizing, replacement and expansion at the
rate of 50% per annum while for those which were included in category (c) and (d) the
first year allowance would be 75% and reinvestment for balancing, modernization and
expansion will enjoy 50% allowance.

3. Foreign private loans for financing
cost of imported plant and machinery for agriculture, services, infrastructure and social
services would be contracted.

4. To promote export oriented units, a
scheme of National Industrial Zones engulfing Industrial Estates, Free Industrial Zones,
Free Trade Zones and Export Oriented Units within the area of its boundary would be
launched at few selected prime sites.

5. To encourage the establishment of Small
and Medium Industries (SMIs) industrial sheds, structures/constructed and sold/leased to
SMIs would be granted an enhanced depreciation allowance @ 30% (in first year) of the cost
incurred on the development of these sheds/structures.

The previous government attempted to
facilitate foreign investment by announcing "New Investment Policy" which
included major policy initiatives and opened new horizons. In the past, foreign investment
was restricted to manufacturing sector which covered only 18% of the GDP. Now foreign
investment is allowed in the sectors like agriculture and services which constitutes above
three fourth of GDP. The main objective of the New Investment Policy was to enhance the
present level of foreign investment to at least US $ 2 billion per year in the fields of
expanding the industrial base, infrastructure and software development, electronics,
engineering, agro-food, value-added textile, tourism and construction industries. Salient
features of Investment Policy 1997 are given below:

1. Foreign Investment on repatriable basis
was also allowed in agriculture, service, infrastructure and social sectors subject to:

a) Joint venture basis (60:40).

b) Amount of foreign equity shall be at
least US $ 1 million.

c) Foreign companies registered in
Pakistan will be allowed.

d) In case of social sector and
infrastructure projects the condition of joint venture will not be applicable (100%
foreign equity may be allowed).

2. Manufacturing sector was prioritized in
the following four categories:

a) Value-added or export industries

b) Hi-tech industries

c) Priority industries

d) Agro-based industries

3. The tariff on imported plant, machinery
and equipment (PME) which was not manufactured locally for category (a), (b) and
agriculture was made zero rated while for categories (c), (d) and social services would be
charged @ 10%.

4. First Year Allowance
(FYA) of cost of
PME would be available @ 90% for (a) and (b), @ 75% for categories (c) and (d), and @ 50%
for other industries. Reinvesment Allowance (RA) for expansion and BMR would be allowed @
50% of cost of PME.

5. Foreign private loans for financing
cost of imported plant and machinery for agriculture, services, infrastructure and social
sectors could be contracted. Foreign controlled companies were allowed for domestic
borrowing to meet their working capital according to their requirement of working capital
for manufacturing, to the extent of 75% and 50% of paid-up capital semi-manufacturing and
non-manufacturing sectors respectively.

6. Labour laws would be amended to enhance
emphasis on productivity, skills and discipline.

7. The sources of investment would not be
probed by any official agency.

8. A composite scheme of National
Industrial Zones (NIZs) engulfing industral estates, free industrial zones and free trade
zones would be launched to promote export oriented units. However, this would not hamper
development of EOUs all over the country.

9. Tariff rationalization at both
provincial and federal level to facilitate foreign investment would be undertaken.

Time series analysis of FDI

Table 1 shows the and of FDI for the last
nine years. There are two sources of FDI namely, Direct Investment and Portfolio. Direct
Investment refers to investment in various industries. This represents fixed investment
and is generally expected to be on long run basis. However, portfolio refers to investment
in stock market and this investment is temporary. Foreign investors take out their money
out of the country where investment in stock market is made. Amount in this respect keeps
changing subject to the level of confidence in the prevalent cirumstances in a country.
During the last nine years, the Karachi Stock Exchange index, having a base of 1000,
fluctuated between 2629 to 777. Wide variations were notified in the above period.

The following conclusions flow from the
analysis of Table 1 relating to FDI in Pakistan.

1. Direct Investment (Foreign)

a) Average direct investmentis US $ 485
million in the previous nine years. This is too small a figure. Previous Governments were
perceptive of US $ 2 billion on yearly basis. The performance is a dismal one.

b) Year 1995-96 had the highest FDI of US
$ 1,102. This year was the oe in which IPPs were executed and their problems are still
unresolved.

c) The current trend is a declining one.
There is a dire need to ensure law and order in our country and take steps to ensure
confidence building in Pakistan. The foreigners have many competing uses of their money in
different countries. They are guided by several considerations including political
stability and congenial atmosphere. They are also guided by the Institutional Ratings
released in te World Development Report which is anually released. Pakistan's rating is 20
out of 100 in the World Development Report 1999-2000 made public in August 1999.
Unfortunately our released in the World Development Report which is annually our rating is
the lowest in SAARC region. The present set up must follow the above negative trends,
bring these to a grinding halt and ensure a rising trend for the future. This will,
accordingly, augur well for our country.

2. Portfolio Investment (Foreign)

No restrictions on the inflow or outflow
of foreign portfolio investment in Pakistan were imposed. Consequently the results shown
in Table 2 exhibit a volatile trend. The range is very high  minimum of minus US $ 9
million to a maximum positive of US $ 1,102 million. The average invetment over the last
nine years was US $ 269 million. There is a need to give a fresh look to the situation and
help develop confidence of foreign investors in Pakistan's stock market.

Table 2 shows group wise distribution of
FDI during 1998-1999 (July-March). It would be noted that 85% represented only six areas
namely, powe, mining and quarrying (Oil & Gas), chemical, pharmaceutical and
fertilizer, petro chemical and petroleum refining, financial business and transport
storage. In the above period total FDI was US $ 296 billion.

In today's world, all countries have
interactions with each other. No country, irrespective of ideological differences, stands
isolated today. FDI is a strong and vibrant instrument for an accelerated socio-economic
development. We must help develop conducive atmosphere in Pakistan and FDI is expected to
follow. This challenge has to be met by all stakeholders in Pakistan. Sincere and
sustained efforts will produce productive results.

The author is Dean: Executive Programs,
Punjab College of Business Administration, Constituent College of Mohammad Ali Jinnah
University, Lahore

President, Institute of Cost and
Management Accountants of Pakistan (ICMAP)